Gross Pay Vs. Mortgage

Lower mortgage rates generally allow for larger borrowing capacity.

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Gross pay is a contributing factor in your ability to get a mortgage loan. Mortgage lenders usually following general debt-to-income guidelines in assessing someone's ability to repay a loan. The higher your gross pay, the larger your borrowing capacity.

Gross Pay Basics

Gross pay is your pre-tax earned pay. If you say "I make $48,000 a year," you typically describe your gross annual income. When used in loan considerations, gross pay is more useful on a per month basis. Thus, $48,000 per year would equate to $4,000 per month. Although gross pay is usually used in mortgage evaluations, net pay is your actual take-home pay after taxes and other deductions.

Debt-to-Income Ratios

Lenders use two common ratios to evaluate your mortgage application -- debt-to-income and mortgage-to-income. The debt-to-income is a comparison of your monthly debt to your gross income. Mortgage-to-income compares your projected mortgage payment to monthly income. Conventional lenders use 28 percent and 36 percent, respectively, for the mortgage and debt ratio maximums. Government-backed FHA lenders have slightly higher caps at 29 and 43 percent. These are guidelines and can be stretched in the event a borrower has significant assets or excellent credit.

Mortgage Basics

A mortgage is a home loan. Most home buyers in the United States rely on bank or mortgage lender financing to be able to purchase homes. On a standard conventional loan, the borrower makes a minimum 20 percent down payment and finances the remaining portion. Typical repayment periods are 15 or 30 years. Monthly payments usually include principal, interest, tax and home insurance installments.

Financial Management

While lenders use general guidelines in assessing creditworthiness, borrowers also need to evaluate their own priorities with budgeting. Borrowing the maximum allowed means relatively high monthly mortgage payments and less discretionary income for fun and leisure. If you have unusual expenses or give generously to charities, you might prefer a lower level of borrowing so more of your pay is available for travel or activities.